Although most Dentists and Specialists recognize the importance of protecting their income with personal disability insurance, many overlook the need for Overhead disability insurance.  Think about it for a minute.  If you suffer a disabling accident or illness, how will you pay your office rent, the salary of a key employee (those who are not members of your own profession and have no ownership interest in the business), practice loan payments, and scheduled installment payments of interest on debt,  telephone and utility bills, equipment leases, and other fixed overhead expenses that exist whether you’re producing or not?  Even if you practice in a partnership, are you willing to make up for your disabled partner’s lack of production to keep the bills paid?  Is that fair to you?

If you don’t carry a properly designed Overhead Expense (OE) disability policy, you could be in big trouble.  Even if you’re only partially disabled (the most common form of disability) and suffer a drop in production, guess what happens: your personal income drops dramatically.  Look at a simple example.  Lets’ say you become disabled for 6 months because of a back injury that requires surgery.  Because you’re the sole producer in your practice, your gross revenue drops proportionately with your decrease in time spent at the office, but fixed overhead expenses will remain about the same.  What’s the result?  Your personal income drops because of your overhead obligations.  Even though you had the foresight to buy a properly structured personal policy to replace a significant percentage of your income, your overhead obligations to keep your business alive until your return will come from you own pocket without overhead coverage.  Remember, as a business owner, you live with two budgets.

Expense/Revenue Ratio

Most Dentists' office expenses equal about two-thirds of gross revenue: leaving one-third for the dentist’s income.  This means if revenue is $30,000 per month, the doctor's income is about $10,000.  Using our example above, what happens if production falls by 50% for six months because of a back injury?  Because fixed overhead expenses stay about the same, the doctor’s income would drop dramatically.  In fact, a 50% drop in gross revenue would likely completely wipe out the dentists income. Because of this expense/revenue ratio, even a modest drop in production can produce a big decrease in a dentist’s income because of the fixed overhead expenses.  This is where a properly structured Overhead Expense DI policy becomes so valuable.   If you have a strong policy that pays adequate benefits for both total and partial disabilities, then you can preserve your personal income much more effectively.

The Overhead Expense Disability policy that we recommend pays residual (partial) benefits based on the dentist’s loss of gross business revenue.  You also never have to be totally disabled first in order to receive benefits.  The type of plan we recommend pays residual/partial benefits to the extent that covered expenses exceed gross business revenue.  In other words, if you’re partially disabled and your gross revenue is not adequate to pay your fixed overhead expenses, the overhead plan can fill the cash void and save your business.  If you’re totally disabled, the policy will reimburse you for up to 100% of the fixed overhead expenses you choose to cover with your policy. If you have adequate personal disability coverage in place, then you’ll still be on a stable financial footing even though your production has ceased or significantly decreased.

All Policies are not created equally

 The biggest difference that you’ll find among Overhead policies from different companies is the waiting period (or elimination period) and how it relates to payment of benefits.  You want to make sure your policy allows you to satisfy your waiting period with days of total and/or partial disability.  You never want a policy that requires you to be totally and consecutively disabled for the entire waiting period.  Even a shorter waiting period on such a policy (like a 30 or 60 day wait) is very difficult to satisfy for two reasons.  First, professionals are often times never totally disabled and second, disability days from the same cause are often “scattered.”  With a consecutive days requirement, if you return to your office even on a partial basis for one day during the waiting period, you have to start counting them over.  Look at this part of the contract very carefully.  Never buy a policy that requires a period of total disability before partial benefits are payable. 

Many group Overhead disability plans have significant limitations on their partial benefits.  Some only pay a 50% benefit for a maximum of three months and will only pay this limited benefit after a period of total disability lasting 60 days.  Read a sample contract carefully before you buy

Strategies for maximizing your Overhead Expense insurance dollars

 When shopping for coverage, first analyze your fixed expenses to determine your true needs.  Don’t count everyone’s salary at the office and don’t count variable expenses that are contingent upon your production.  Be logical so that you don’t overbuy.  Remember that Overhead policies are reimbursement policies for fixed overhead expenses.  They are not designed to cover Buy-Sell funding obligations or your own salary.  Premiums for Overhead policies are fully tax-deductible as an ordinary business expense, no matter the type of business entity.

 When searching for the right OE policy, be sure to pay special attention to the following contract features:

·                     Are the premiums Level and Guaranteed to Age 65 with a Non-Cancelable contract?

·                     Is the Waiting Period satisfied with days of total and/or partial disability from the same cause that need not be consecutive?

·                     Does the policy have adequate Future Increase Options so you can increase your coverage as your business grows?

Remember that any type of insurance policy is a contract between you and the insurance company.  Many Dentists go without any overhead coverage or buy a group plan for the sole purpose of saving money and then find out at a very difficult time that they didn’t have the coverage that they need.  Although price is an important consideration, ask yourself why you bought the coverage in the first place.  Simply shop for a quality contract and then you’ll rest assured that your practice expenses are covered in the event of disability.  It will relieve an enormous amount of pressure on you and your family should the unforeseen occur.